What Are Accruals And Prepayments?


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Anonymous answered
Accruals : To recognize the due expenses (Liabilities) in our books prior to its payment (Credit purchases or services ).Also it considered as Liabilities and have credit nature


John & Sons Corp. Has received some invoices amounting $ 10,000 on 20 February, 2009 that pertained to Mark Co. ,these invoices were against finalizing some repairing works and the two parties have agreed to be due on 9th March, 2009 from that date of receiving invoices.

So we still in February 2009 , so we have incurred expenses should be charged to February 2009 before making the payment so the accounting entry should be as follow:-

(1) - On 20 February, 2009

Repair and Maintenance Expenses $ 10,000
Creditors - other suppliers (Mark Co.) $ 10,000

(2) On 9th March, 2009 when we shall make the payment against that due invoices

Creditors - other suppliers (Mark Co.) $ 10,000
Bank / Cash $ 10,000

Prepayments: To make the payment against expenses before goods or services being delivered or rendered, also prepayments called prepaid expenses which are considered as current asset and have debit nature.

Example : XYZ Co. Is going to lease new apartment for the new branch they decided before, Adam the apartment owner require $ 3,000 to be paid quarterly as rent. Assume that lease agreement state that TNT has right to use the apartment on 01/01/2009. SO the accounting entry when makingthe recognition & Payment on 01/01/2009

Rent Expenses $ 1,000 ( from 01/01/2009 till 01/02/2009)
Prepayment $ 2,000 ( from 01/02/2009 till 01/04/2009)
(Prepaid Expenses)
Creditors - other suppliers $ 3,000 (When Making the payment)

Creditors - other suppliers $ 3,000 (Recognition of Liability of the 3 months)
Current Account (Bank) / Cash $ 3,000 (When Making the payment)

Best Regards,
Mostafa Mahmoud
Financial Accountant
Anonymous Profile
Anonymous answered
Accruals are the payments(expenses) or receipts(income), that are due(incurred) for the current(post) financial year ended but have not paid or received in that particular post financial year is to be recorded as accruals to bring forwarded to the next accounting financial year.

Prepayments are the payments(expenses) or receipts(income), that you had paid or received in advanced for next  or more financial year to come.

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